16.4.1 Subsidies

Subsidies are often used to facilitate or accelerate the uptake of specific
technologies in an investment environment where competing technologies/practices
are at a relative economic advantage. As a tool, subsidies play a problematic,
but important role in technology transfer. While there are numerous examples
where subsidies have either spoiled the market for a new technology, resulted
in an inferior product, or blocked market forces from operating properly (Barnes
et al., 1994; Kammen, 1995a,b), there are many instances where subsidies have
been critical to successful technology transfer. In a number of case studies
(e.g., Case studies 1, 4, and 14)
subsidies significantly enhanced the transfer and adoption process because they
addressed a specific market imperfection and were either limited in extent or
duration, or they took the form of logistical support or training.

These programmes did not entail direct cash payoffs. Key factors for success
involve the timing and magnitude of subsidies, the degree to which local co-payment
or participation are required, and the type of support provided (direct technology
subsidy vs. market support). In specific instances, subsidising the 'soft' side
of technology transfer, such as infrastructural support or information programmes
may prove far more effective in sustaining the uptake of technologies.

Subsidies can be classified into three major areas: (1) development subsidies;
(2) technology sales subsidies; (3) and market-support and educational subsidies.
Each type of technology/system support has its advantages and drawbacks. The
critical policy decision in support of technology transfer, therefore, is under
what conditions do one or more of these approaches most directly and cost effectively
address market imperfections, social, economic and environmental needs.

Development Subsidies:
Subsidies in the product development phase typically support the classical 'R&D'
phase, pre-market design, or possibly diversification from a prototype to models
tailored to particular market niches. These subsidies are often in the form
of a direct grant or loan to a particular manufacturer, and frequently on the
basis of a promising engineering design. A benefit of this approach is that
it can be relatively simple to evaluate the proposal and to chart the impact
of the subsidy in terms of product development. One drawback is that funding
institutions, international, multinational, or national, may often fall into
the trap of 'picking winners' before any feedback via the market from end-users
is available (Cohen and Noll, 1991; Margolis and Kammen, 1999). A number of
recent technology and environmental policy efforts have illustrated opportunities
to move beyond this roadblock, however, by promoting technologies in competitive
programmes where subsidies are provided for combinations of technical and managerial
innovations. Recent efforts to promote improved cookstoves in China (Barnes
et al, 1994), were based on provincial-level competitions to best meet the energy
efficiency and economic needs of households.

Technology Sales Subsidies:
Sales subsidies are also a traditional mechanism to support and develop the
market for a new technology. In the classic formulation, end-users receive a
rebate from a third party (often the government) for the purchase of a technology.
The benefits of this approach are that the subsidy can directly reduce up-front
capital cost, which is often the critical obstacle for the dissemination of
new technologies (Gupta and Ravindranath, 1997; Duke and Kammen, 1999). Conversely,
the drawback of this approach is that lump-sum subsidies may not provide an
incentive for the performance of the technology, only the initial sales. In
Nepal, however, subsidies for biogas digesters have been provided in stages
over several years to guarantee that the systems perform well. These subsidies
are incremental to provide the most support to the poorest and most remote households.
Finally, the biogas digester subsidy is provided to the installer, who also
holds the loan to cover end-user purchases. The advantage of this arrangement
is that the risk of a novel, and often untested technology does not fall on
the end-user.

Market-Support and Educational Subsidies:
There has been a recent explosion of interest in subsidies that avoid direct
financial subsidies while still supporting an emerging new technology or clean
energy practice. One way to accomplish this is to subsidise the educational,
training, or other knowledge-based aspect of the R&D to commercialisation
pipeline. For many technologies, particularly in developing nations, there is
only a weak link between a promising new technology development and the marketing
skills and resources needed to achieve commercial success. Training programmes,
efforts to assist with market development and other such 'soft' subsidies can
often make a great deal of difference. The benefits are often far greater than
would a direct hardware subsidy. An example of this approach has been the development
of improved cookstoves in Kenya (Case Study 1) where marketing
was subsidised, but the cost of the stoves themselves reflected the actual production
and market costs.

An informative example program that integrates pieces from each of the three
subsidy categories is that of Greenfreeze refrigerator program. The Greenfreeze
(Greenpeace, 1999) program in Europe brought together scientists who had extensively
researched the use of propane and butane as refrigerants, with an East German
company. The result was a research effort that identified a particularly effective
and economically well-suited mixture of refrigerants that were as effective
as traditional refrigerants.

The initial announcement of the plan to market this "Greenfreeze"
product resulted in Greenpeace being able to gather tens of thou-sands of pre-orders
for the yet-to-be produced new refrigerator from environmentally conscious consumers
in Germany. This overwhelming support from the public secured the capital investment
needed for the new 'Greenfreeze' product. Initial industry resistance to this
switch in refrigerant was overcome by the demonstration of the market demand,
and Greenfreeze rapidly became the dominant technology in Europe. There are
now over 100 different Greenfreeze models available for purchase.

Long-Term Sustainability
The types of subsidies discussed above each illustrate the importance of targeting
windows of opportunity where financial, institutional, educational, or public
relations support for promising technologies can have a market-opening or a
lasting impact on technology adoption and sustainability. In many cases, however,
the concern exists that short-term technology support could lead to long-term
economic dependency on the subsidies or other support mechanisms. Many of the
Case Studies in this chapter address this issue (e.g. Cases
1- 5, 8, 13,
17, 22- 24,
27 - 28). The over-arching lesson
is that well-targeted subsidies, often focusing on market support, information
and training, and not direct subsidies of the specific technology can make a
dramatic difference in an emerging market. Further, providing support to initiate
or jump-start a market can then lead to dramatic product and cost improvements
as well as large increases in demand (Duke and Kammen, 1999). The transition
from novel idea to important product generally obviate the need for subsidies
exactly at a stage when competition within the market becomes a more efficient
mechanism to spur innovation and cost reduction. This process both argues for
the importance of intelligently designed subsidies that support local (individual,
community and private-sector) knowledge and control of a new technology and
illustrates the opportunities for long-term sustainability of new ESTs.